Tax equalisation is an arrangement between employees and employers whereby the employee works in another location to their home country and should be neither better nor worse off from a tax perspective than if they stayed at home.
It is quite a common arrangement between employees and employers where individuals are sent on secondments to other jurisdictions.
The employee will continue to be subject to the same level of tax as if they had remained in their home country.
The employer will deduct ‘hypothetical tax’ from the employee, which the employer will then use to settle any actual liabilities in the home and host countries.
The main advantage to this is removing any financial worries from the employee’s mind as they will continue to pay tax at an agreed rate and will not have to worry about any higher tax costs associated with working in another location.
For an individual arriving in the UK, a modified payroll (also known as an EP Appendix 6) should be implemented, and to do this, an application must be made to HMRC.
This allows for the strict operation of PAYE to be relaxed. The employer enters into a contract with HMRC where they are required to perform calculations and undertake specific calculations instead.
With an EP Appendix 6, the employer must make an undertaking to ensure that the employee submits their Self-Assessment properly for the relevant tax year.
The agreement should always be clearly expressed in writing and set out which pay items will be tax equalised.
If you would like some further information in relation to tax equalisation and Appendix 6 applications, please do get in contact with us, and we would be happy to assist.
